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Why State and Local Tax Revenues Soared at the End of 2017

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By Michael Rainey

May 2, 2018

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State and local governments saw a big jump in tax revenues in the final three months of 2017, due in large part to an increase in the prepayment of income and property taxes as some high-income residents sought to take advantage of deductions that will be sharply reduced in 2018.

The Rockefeller Institute of Government, which released a new state revenue reporton Monday, said that “The Tax Cuts and Jobs Act (TCJA), enacted in late December 2017, created strong incentives for some high-income taxpayers to act fast and prepay their state and local income and property taxes to take advantage of the expiring tax breaks, namely the state and local tax (SALT) deduction, which is capped at $10,000 per year as of January 1, 2018.”

As a result, personal income tax revenues grew at a 15.1 percent rate in the fourth quarter of 2017, well above the 3.2 percent average rate of the previous four quarters. Similarly, local property tax revenues grew at a 9.2 percent rate in Q4, compared to a 3.5 percent average rate previously.

Other state and local tax revenues increased as well, though at a lesser pace.

The outlook for the remainder of 2018 and 2019, however, is uncertain, Rockefeller Institute’s Lucy Dadayan said, in the wake of the many new rules laid out in the Republican tax bill passed late last year. “State and local tax revenues will likely continue to fluctuate in the coming quarters as various entities, including states, high-income taxpayers, pass-through entities, corporations, and tax professionals are examining the new rules of the game, exploring loopholes, and looking into ways to minimize tax liability in light of the new provisions of the TCJA,” Daydan wrote.